The Impact of Policy Incentives on Long‐Term Care Insurance and Medicaid Costs: Does Underwriting Matter?

Objective

To test whether underwriting modifies the effect of state‐based incentives on individuals’ purchase of long‐term care insurance.

Data Source

Health and Retirement Study (), 1996–2012.

Study Design

We estimated difference‐in‐difference regression models with an interaction of state policy indicators with individuals’ probabilities of being approved for long‐term care insurance.

Data Extraction

We imputed probabilities of underwriting approval for respondents in the using a model developed with underwriting decisions from two U.S. insurance firms. We measured the elasticity response to long‐term care insurance price using changes in simulated after‐tax price as an instrumental variable for premium price.

Principal Findings

Tax incentives and Partnership programs increased insurance purchase by 3.62 percentage points and 1.8 percentage points, respectively, among those with the lowest risk (highest approval probability). Neither had any statistically significant effects among the highest risk individuals.

Conclusions

We show that ignoring the effects of underwriting may lead to biased estimates of the potential state budget savings of long‐term care insurance tax incentives. If the private market is to play a role in financing long‐term care, policies need to address the underlying adverse selection problems.